European Central Bank holds rates but offers lenders cheaper credit
The European Central Bank has eased the conditions on its super-cheap loans for banks and launched a new package of “pandemic” lending in its latest bid to shore up the Eurozone during the coronavirus outbreak.
The central bank stopped short of cutting interest rates further into negative territory or buying “junk” bonds, however.
The decision came just hours after data showed that the Eurozone economy shrank at the fastest rate in its history in the first quarter of the year.
GDP plunged 3.8 per cent in the first three months of the year compared to the previous quarter. Analysts say the second-quarter figures will be much worse.
At a virtual press conference following the meeting, ECB president Christine Lagarde said the Eurozone economy could shrink between five and 12 per cent this year.
The central bank said it will ease the conditions on its “targeted longer-term refinancing operations”, known as TLTROs, so the interest rate is in effect minus one per cent.
TLTROs are long-term loans to banks which aim to preserve favourable borrowing conditions and stimulate lending to the real economy. The negative interest rate means banks are in effect paid to borrow money.
The ECB also said it will launch “pandemic emergency longer-term refinancing operations”, or PELTROs. These will be seven lending schemes aimed at easing conditions in lending markets by pumping money into the system.
The bank’s main deposit rate was left on hold at minus 0.5 per cent, while the governors also chose not to ramp up bond-buying any further for now.
The ECB has intervened on an unprecedented scale, launching a €750bn (£650bn) bond-buying scheme called the pandemic emergency purchase programme (PEPP) that puts it on track to buy more than €1 trillion of bonds this year.
Although the ECB kept its powder dry at this meeting, analysts say it is likely to increase its interventions over the coming months as some kind of recovery from the coronavirus crash takes hold. It could start to buy bonds with “junk” credit ratings, as the US Federal Reserve has done.
In a statement, the ECB said: “The governing council is fully prepared to increase the size of the PEPP and adjust its composition, by as much as necessary and for as long as needed.”
Lagarde pushed for countries to do more with fiscal policy in the meantime. So far, the central bank has led the economic charge while a united Eurozone response has been lacking.
“Ambitious efforts are needed, notably through joint and coordinated policy action to guard against downside risks and to underpin the recovery,” she said.